A handful of Federal Reserve officials on Monday left open the door to additional large interest-rate cuts, noting that current rates still weigh heavily on the US economy.
“Over the next 12 months, we have a long way to come down to get the interest rate to something like neutral to try to hold the conditions where they are,” Chicago Fed President Austan Goolsbee said in a moderated Q&A event.
Neither Goolsbee nor any of his colleagues said they already favor repeating the half-point cut made by the central bank on Sept. 18, saying incoming data would guide their decision making. The Federal Open Market Committee next meets just after the presidential election, on Nov 6-7.
The Chicago Fed chief said he estimated the central bank’s current benchmark interest rate was “hundreds” of basis points above neutral, the level at which policy neither stimulates nor restricts economic growth. The neutral rate cannot be directly measured, only estimated.
Goolsbee, who sounded more strident than other officials in calling for lower borrowing costs, emphasized that employment conditions and inflation were each at favorable levels, but wouldn’t remain so unless the Fed lowered rates “significantly” in the coming months.
“If you’re restrictive for too long, you’re not going to be at that sweet spot on the dual mandate for much longer,” he said.
Goolsbee, Atlanta Fed President Raphael Bostic and Minneapolis’ Neel Kashkari all said Monday they supported the decision taken by Fed officials last week to lower their benchmark rate by a half percentage point to a range of 4.75% to 5%.
In projections also released last week, the mean estimate of the longer-run neutral rate from Fed officials was 2.9%.
The projections also show a wide range of views among officials on where rates should be at the end of 2025.
Bostic, while decidedly more cautious than Goolsbee over how quickly the Fed should cut, also nodded to the room the Fed likely has to lower rates before it might reach neutral.
“I don’t know anyone who would plausibly argue with the notion that we are a fair distance above it,” he said during a virtual event organized by the European Economics and Financial Centre.
He said uncertainty over both inflation and employment should rule out any potential for cutting by more than a half-point at a time, he said.
While he didn’t comment directly on whether he’d support another half-point cut, Bostic warned against assuming last week’s move would be repeated. But, he added, “any further evidence of material weakening in the labor market over the next month or so will definitely change my view on how aggressive policy adjustment needs to be.”
Neutral Debate
Fed policymakers have been engaged in a running debate for many months over where the neutral rate may lie, and whether it’s risen since the Covid-19 pandemic disrupted the US and global economy so severely. Most economists believe it has moved up, though it’s uncertain whether that’s a temporary or permanent change.
Kashkari weighed in on that discussion Monday, pointing to the persistent strength of the US economy despite high policy rates in an essay posted on the bank’s website,
“The longer this economic resilience continues, the more signal I take that the temporary elevation of the neutral rate might in fact be more structural,” Kashkari wrote.
Still, he added, the overall stance of policy “remains tight.” In an interview with CNBC following the release of his essay, Kashkari said he favors cutting rates by a quarter-point at each of the central bank’s two remaining meetings this year.
Two other Fed officials weighed in Friday, including Governor Christopher Waller, who also backed the move.
Waller said he was moved to support the half-point cut by unexpectedly favorable inflation data in recent weeks and that he would likely support quarter-point cuts at each of the next two policy meetings.
New surprises in the data, however, could knock him off that pace.
“If labor market data worsens, or if the inflation data continues to come in softer than everybody was expecting, then you can see going at a faster pace,” he said, before adding that a fresh pickup in inflation could also cause the Fed to pause its cutting.
His views contrasted with Governor Michelle Bowman, who said Friday she voted against the decision because she remains concerned about above-target inflation. Bowman became the first Fed governor to dissent against an interest-rate move since 2005.
Labor Market Worries
Goolsbee underlined his argument by cautioning that when labor markets deteriorate, they do so more quickly than central bankers can deliver relief through rate cuts.
Significant layoffs have historically created a negative feedback loop in which job losses cause a pullback in spending that then drives other businesses to lay off workers in response to lower demand.
“It’s just not realistic to wait until problems show up,” he said. “If we want a soft landing, we can’t be behind the curve.”
The unemployment rate, which hit a historic low of 3.4% last year, has risen to 4.2%. Goolsbee said Monday that’s a level that most would regard as commensurate with full employment.
“Basically, we would love to freeze both sides of the Fed’s dual mandate right here,” Goolsbee said.
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